Harper’s GST legacy leaves the fiscal ship at the mercy of the world economy

Paul Martin’s spending plans were to be financed out of federal budget surpluses. By comparison, Justin Trudeau is walking a budget tightrope over a fiscal safety net frayed by a decade of Conservative tax cuts. Tuesday’s Liberal budget does little to address a structural revenue shortfall.

Thestar.com
March 24, 2016
By Chantal Hebert

For all the talk about a new activist federal era, Prime Minister Justin Trudeau’s first budget largely picks up where Paul Martin left off - at least when it comes to spending priorities.

Improving the terms of the relationship between Canada and its indigenous people was front and centre on the former Liberal prime minister’s radar. At the time of its defeat in 2006 the Martin government was about to start implementing the Kelowna Accord.

Martin had also spent his final years as minister of finance advocating a new fiscal pact between the federal government and Canada’s big cities. As prime minister, he had set out to translate his intentions into actions.

Both files emerged as major priorities in Tuesday’s budget with billions of dollars to be spent on the municipal and indigenous fronts over the next few years.

But this week’s budget also demonstrates that turning back the clock a decade is easier said than done. Much water or, in this case, much federal wealth in the shape of tax cuts has flowed under the bridge over the past 10 years.

Martin’s spending plans were to be financed out of impressive federal budget surpluses, and he had a revenue base that ensured those would keep on coming.

By comparison, Trudeau is walking on a budget tightrope over a fiscal safety net frayed by a decade of Conservative tax cuts. Tuesday’s Liberal budget does little to address a structural revenue shortfall.
On the contrary, instead of erasing Harper’s fiscal footprint, the Liberals have chosen to tiptoe around it.

For, of all the signature Conservative policies, a twice-lowered GST seems the most likely to survive the transition to a different government. On the day after the budget, Trudeau categorically maintained that he would not be raising the tax back to its pre-Harper level of 7 per cent.

This lack of political fortitude is understandable. The Liberals did not talk about the GST at the time of the election campaign. No party would then go near what strategists saw as the third rail of federal fiscal politics. There was no political cover for Trudeau to talk about raising it before the election and there still is not now that he is in office.

Given a choice between slaying the sacred cow of a lower GST, or breaking with the doctrine of balanced budgets, Trudeau’s Liberals determined that the path of least public resistance led to the latter.

But with every GST point worth about $7 billion a year to a cash-starved federal government, good politics stands to make for crippling fiscal policy.

None of the other tax changes of the first Liberal budget really addresses the shrunken capacity of the federal government to raise revenues on par with its policy ambitions.

A string of projected yearly deficits that stretches beyond the current mandate speaks to the existence of a structural gap between those ambitions and the fiscal capacity to fulfil them. More than a low-growth economic cycle is at play.

The last government to leave behind a solid budget surplus was that of Martin. None of the parties that ran in the last election would have produced a balanced budget this year without engaging in a round of spending cuts.

The main consequence of preserving Harper’s GST legacy is to essentially leave the federal fiscal ship at the mercy of the vagaries of the world economy. But if the recent decade is any indication, it will be hard to raise that ship out of the red even in moderately good times and/or to keep it on a steady deficit-free course. With so much money committed to recurring tax cuts, it is hard to see how major federal initiatives on the social policy front would be sustainable in the future.

Based on the budget roadmap sketched out this week, one might presume either that any major spending such as more money for health care that did not make the cut of this first budget is unlikely to materialize over the course of the current mandate, or else that the deficit projections put forward by Finance Minister Bill Morneau - as high as they may seem - are actually a floor.